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Copyright: Toni Straka, 2005-2011 This blog is for information and entertainment purposes only. Under no circumstances does this information represent a recommendation to buy or sell securities or any other type of investment instruments.

Tuesday, March 09, 2010

Word has probably spread that the European Union now attempts to solve the debt crisis with the creation of a European Monetary Fund (EMF). This shows one more time the fierce commitment of the EU to fight debt with new debt - which never worked in history - instead of developing a radical banking reform that would curb derivatives and impose strict rules on off-balance sheet risks while tackling soaring budget deficits aggressively.
As with most "important" announcements these days - of which most are vaporizing overnight in a EU where governments begin to mutually shoot broadsides against their Pan-European fellows - the EMF "plan", initiated by German Finance Minister Wolfgang Schaeuble, is maybe a headline-grabber, but lacks among all details the most important one: Where will the money come from???

While EMF may sound trustworthily as a word game on the IMF (International Monetary Fund) this blogger wonders which Eurozone member could fund this monetary fund. As all Eurozone countries except micro-sized Luxemburg are currently confronted with a massive expansion of budget deficits that precede higher debt-to-GDP ratios in 2010 and 2011 there are simply no funds around that could go into the proposed EMF unless Eurozone members kiss goodbye another part of what is left of their gold reserves. In comparison, the IMF sits on a hoard of 3,000 metric tons (of which close to 200 tons are earmarked for sale this year.) Unfortunately, as they kept selling the best performing asset of the last decade - gold - central banks and the governments behind them will not be very keen to continue this foolish course of giving away gold, the only money (not currency) that has never lost its value.
German chancellor Angela Merkel welcomed the initial proposal, adding, "it leaves lots of questions open of course, but I find the idea good and interesting."
From a report on euobserver.com:

German Chancellor Angela Merkel threw her support behind the idea of an IMF-style European Monetary Fund on Monday (8 March), but added that the EU treaty would need to be changed as a result.
"It leaves lots of questions open of course, but I find the idea good and interesting," Ms. Merkel told reporters in Berlin.
"But of course we are going to have to ask ourselves who will pay into it, how independent it will be from the European Commission ...Without treaty changes we can't form such a fund."
News that Germany's most senior politician believes the establishment of a European Monetary Fund to help struggling eurozone countries will require a treaty change is unlikely to bring much cheer to EU member states.
A hugely drawn-out Lisbon Treaty ratification process, which saw the Irish initially reject the new rulebook and Czech President Vaclav Klaus infuriate EU officials with last minute demands, has left a heavy cloud of treaty fatigue hanging over national capitals.
The reason behind the need for a treaty change is the EU's 'no bail-out' rule, said Ms Merkel, as outlined in the Maastricht treaty which set up the single currency area.
The German chancellor insisted however that the EU should not be put off by the prospect of further treaty negotiations. "We want to be able to solve our problems in the future without the IMF," she said.
French officials and analysts have also suggested a treaty change will be necessary, meaning the establishment of a European Monetary Fund could potentially take several years and will certainly not be ready in time to help Greece with its current difficulties.
Doubts over Greece's economy and the prospect of a possible sovereign debt default have brought the eurozone's institutional set up under closer scrutiny in recent weeks.
While the EU has a mechanism to help non-eurozone states struggling with balance of payments difficulties, availed of by Hungary, Latvia and Romania last year, the eurozone toolbox is currently empty when it comes to helping one of its 16 members.
Ever since its conception in the early 1990s, economists have warned that a European single currency area, without a fiscal and political union to back it up, could be in danger of breaking apart.
With markets currently taking a dim view on the public finances of several eurozone members, that prospect has never been closer than now, say analysts, with the European Commission on Monday signaling its willingness to get working on plans to set up a European support fund to help struggling states in the future.
Portugal became the latest country on Monday to announce plans to cut spending, delay investments and sell state assets, in a bid to fix its finances.
While the idea for a European Monetary Fund, first floated at a senior political level by the German finance minister Wolfgang Schauble over the weekend, has won much support, the European Central Bank's chief economist, Juergen Stark, has come out against it.
On Monday he said, "it could be very expensive, create the wrong incentives and finally, burden countries [that have] more solid public finances."

Officials say a European Monetary Fund is unlikely to be ready in time to help Greece with its current predicament however, with Greek Prime Minister George Papandreou winning verbal support from French President Nicolas Sarkozy after a meeting between the two on Sunday.
"France is by the side of Greece in the most resolute fashion," said Mr Sarkozy. "The euro is our currency. It implies solidarity. There can be no doubt on the expression of this solidarity."
He did not outline any specific measures to help Greece however, but said his finance minister was working on a plan with her European colleagues.

Eurozone Deficits to Widen in 2010
2008 figures from Eurostat , the latest available, showed a surging total Eurozone budget deficit of €182 billion or 2% of Eurozone GDP in comparison with a deficit of €52 billion in 2007. Download an extensive Eurostat bulletin on government finance statistics 1996-2008 here.Tag-search "debt" on this blog to find ample evidence that the rise in budget deficits has continued ever since.
So far Greece and Portugal tackle austerity measures aggressively, but another 24-hour general strike next Thursday may show Greek Prime Minister Papandreou, currently looking for money in the USA, that the sovereign may have different ideas how to alleviate the crisis.
An excerpt from a Reuters dispatch from Monday evening:

Portugal announced plans to cut its deficit to 2.8 percent of gross domestic product in 2013 from 8.3 percent this year by trimming spending on civil servants and public investment, and raising taxes on high incomes and stock market gains.
The programme is seen as the key to convincing markets that Portugal will tackle its high deficit and debt after coming under scrutiny by investors fearing it may be next in line to have Greek-style fiscal problems.
Under the plan, Portugal's public debt would peak at 90.1 percent of GDP in 2012 and fall thereafter. Greece's debt is set to reach 125 percent of GDP this year.

Austria also announced deficit measures today that would include a capital gains tax on long-term holdings. As the country has seen debt:GDP climb from 60% to 67% within a year I doubt there will be any money left for an EMF.
And it gets questionnable that economic Eurozone leader Germany has anything to spare for the EMF either.
German Bundesbank President Axel Weber, most likely successor to ECB President Jean-Claude Trichet, said on Bloomberg TV on Tuesday (Hat Tip Zerohedge), he expects another reduction in GDP in Q1 2010, adding that this does not change his expectations of 1.5% German growth in 2010. Isn't he optimistic, is he?
France does not have any silverware for the EMF left too. The Sarkozy government is expected to become the top debt-issuer in the Eurozone by far, wanting to raise €454 billion this year.
As we now have established the fact that the Eurozone has no money to save itself, can we please proceed to the next plan instead of wasting time with something that would be nothing else than another stillborn debt-paper producing United Debts of Europe (UDE) institution lacking what the whole world lacks: capital!

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EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....

FROM THE US TREASURY WEBSITE: "Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy."

A LESSON FROM HISTORY BOOKS: The past 300 years have proven that ALL fiat money experiments ended in complete devaluation. From Rome to Britain: every empire vanished into oblivion soon after it went off the gold standard. It is time to recognize the obvious: Unbacked money has never worked.

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About Me

I am an INDEPENDENT Certified Financial Analyst who worked as a financial journalist for 15+ years and now evaluate global market trends. Analyzing financial and political news permanently I want to share my insight with those who understand that we are in an era of global redistribution of wealth. The US-European centric approach does not work anymore. 6 billion people in the developing countries now demand their fair share of the world's resources.
Having worked many years for a leading newswire I have learned to understand the fatal concept of ever expanding credit by heart. If you want to learn about the future of the economy, study history.